EXHIBIT 99.3 Secured Convertible Note - Longview Fund, LP
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND
THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO SOUTH TEXAS OIL COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED.
SECURED CONVERTIBLE NOTE
FOR VALUE RECEIVED, SOUTH TEXAS OIL COMPANY, a Nevada corporation
(hereinafter called "Borrower"), hereby promises to pay to LONGVIEW FUND, LP,
600 Montgomery Street, 44th Floor, San Francisco, CA 94111, Fax: (415) 981-5300
(the "Holder") or order, without demand, the sum of $960,870 Dollars, with
simple interest accruing on July 28, 2007 (the "Maturity Date"), or sooner as
described herein.
This Note has been entered into pursuant to the terms of a subscription
agreement between the Borrower and the Holder, dated of even date herewith (the
"Subscription Agreement"), and shall be governed by the terms of such
Subscription Agreement. Unless otherwise separately defined herein, all
capitalized terms used in this Note shall have the same meaning as is set forth
in the Subscription Agreement. The following terms shall apply to this Note:
ARTICLE I
GENERAL PROVISIONS
1.1 Interest Rate. Subject to Section 5.7 hereof, interest payable
on this Note shall accrue at a rate per annum (the "Interest Rate") equal to
the "prime rate" published in The Wall Street Journal from time to time, plus
four percent (4%). The interest rate shall be increased or decreased as the
case may be for each increase or decrease in the prime rate in an amount equal
to such increase or decrease in the prime rate; each change to be effective as
of the day of the change in such rate. The Interest Rate shall not be less
than eight percent (8%).
1.2 Conversion Privileges. The Conversion Privileges set forth in
Article II shall remain in full force and effect immediately from the date
hereof and until the Note is paid in full regardless of the occurrence of an
Event of Default. The Note shall be payable in full on the Maturity Date,
unless previously converted into Common Stock in accordance with Article II
hereof; provided, that if an Event of Default has occurred, the Borrower may
not pay this Note, without the consent of the Holder, until up to one year
after the later of the date the Event of Default has been cured or one year
after the Maturity Date.
1.3 Default Interest Rate. A default interest rate of fifteen
percent (15%) per annum shall apply to amounts owed hereunder which are not
paid on their respective due dates. Interest payable on this Note shall accrue
from the date of this Note and be payable upon each Conversion, January 1,
2006, semi-annually thereafter, and on the Maturity Date, accelerated or
otherwise, when the principal and remaining accrued but unpaid interest shall
be due and payable, or sooner as described below.
ARTICLE II
CONVERSION RIGHTS
The Holder shall have the right to convert the principal due under this
Note into Shares of the Borrower's Common Stock, $.001 par value per share
("Common Stock") as set forth below.
2.1. Conversion into the Borrower's Common Stock.
(a) The Holder shall have the right from and after the date of the
issuance of this Note and then at any time until this Note is fully paid, to
convert any outstanding and unpaid principal portion of this Note, and accrued
interest, at the election of the Holder (the date of giving of such notice of
conversion being a "Conversion Date") into fully paid and nonassessable shares
of Common Stock as such stock exists on the date of issuance of this Note, or
any shares of capital stock of Borrower into which such Common Stock shall
hereafter be changed or reclassified, at the conversion price as defined in
Section 2.1(b) hereof (the "Conversion Price"), determined as provided herein.
Upon delivery to the Borrower of a completed Notice of Conversion, a form of
which is annexed hereto, Borrower shall issue and deliver to the Holder within
three (3) business days from the Conversion Date (such third day being the
"Delivery Date") that number of shares of Common Stock for the portion of the
Note converted in accordance with the foregoing. At the election of the
Holder, the Borrower will deliver accrued but unpaid interest on the Note in
the manner provided in Section 1.3 through the Conversion Date directly to the
Holder on or before the Delivery Date (as defined in the Subscription
Agreement). The number of shares of Common Stock to be issued upon each
conversion of this Note shall be determined by dividing that portion of the
principal of the Note and interest to be converted, by the Conversion Price.
(b) The Borrower shall issue for each $1,000 of Note principal and
interest for which a Notice of Conversion is given, an amount of Common Stock
equal to 0.000195652 of the Common Stock of the Company outstanding on a fully
diluted basis as of the last day preceding the relevant Conversion Date. For
the purposes of the aforedescribed calculation, "fully diluted basis" shall
include all of the Shares of Common Stock issuable upon conversion of all of
the Notes issuable to the Subscription Agreement as if all such Notes were
fully converted on the Initial Closing Date but shall not thereafter include
shares of Common Stock issued upon actual conversion of such Notes and exercise
of the Warrants; issuable pursuant to the Subscription Agreement. As employed
in this Note, "fully diluted basis" means all of the outstanding Common Stock
together with all Common Stock that may be issued upon the conversion or
exercise of all outstanding options, warrants, convertible instruments and
similar agreements as of a determination date, including Common Stock added to
treasury after Initial Closing Date.
(c) The Conversion Price and number and kind of shares or other
securities to be issued upon conversion determined pursuant to Section 2.1(a),
shall be subject to adjustment from time to time upon the happening of certain
events while this conversion right remains outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at any time shall
consolidate with or merge into or sell or convey all or substantially all its
assets to any other corporation, this Note, as to the unpaid principal portion
thereof and accrued interest thereon, shall thereafter be deemed to evidence
the right to purchase such number and kind of shares or other securities and
property as would have been issuable or distributable on account of such
consolidation, merger, sale or conveyance, upon or with respect to the
securities subject to the conversion or purchase right immediately prior to
such consolidation, merger, sale or conveyance. The foregoing provision shall
similarly apply to successive transactions of a similar nature by any such
successor or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section shall apply to such securities of such
successor or purchaser after any such consolidation, merger, sale or
conveyance.
B. Reclassification, etc. If the Borrower at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes that may be issued or
outstanding, this Note, as to the unpaid principal portion thereof and accrued
interest thereon, shall thereafter be deemed to evidence the right to purchase
an adjusted number of such securities and kind of securities as would have been
issuable as the result of such change with respect to the Common Stock
immediately prior to such reclassification or other change.
C. Stock Splits, Combinations and Dividends. If the shares of Common
Stock are subdivided or combined into a greater or smaller number of shares of
Common Stock, or if a dividend is paid on the Common Stock in shares of Common
Stock, the Conversion Price shall be proportionately reduced in case of
subdivision of shares or stock dividend or proportionately increased in the
case of combination of shares, in each such case by the ratio which the total
number of shares of Common Stock outstanding immediately after such event bears
to the total number of shares of Common Stock outstanding immediately prior to
such event.
D. Share Issuance. So long as this Note is outstanding, if the
Borrower shall issue or agree to issue any shares of Common Stock except for
the Excepted Issuances (as defined in the Subscription Agreement) for a
consideration less than the Conversion Price in effect at the time of such
issue, then, and thereafter successively upon each such issue, the Conversion
Price shall be reduced to such other lower issue price. For purposes of this
adjustment, the issuance of any security carrying the right to convert such
security into shares of Common Stock or of any warrant, right or option to
purchase Common Stock shall result in an adjustment to the Conversion Price
upon the issuance of the above-described security and again upon the issuance
of shares of Common Stock upon exercise of such conversion or purchase rights
if such issuance is at a price lower than the then applicable Maximum Base
Price. The reduction of the Conversion Price described in this paragraph is in
addition to other rights of the Holder described in this Note and the
Subscription Agreement.
(d) Whenever the Conversion Price is adjusted pursuant to Section
2.1(c) above, the Borrower shall promptly mail to the Holder a notice setting
forth the Conversion Price after such adjustment and setting forth a statement
of the facts requiring such adjustment.
(e) During the period the conversion right exists, Borrower will
reserve from its authorized and unissued Common Stock not less than 175% of the
number of shares of Common Stock issuable upon the full conversion of this
Note. Borrower represents that upon issuance, such shares will be duly and
validly issued, fully paid and non-assessable. Borrower agrees that its
issuance of this Note shall constitute full authority to its officers, agents,
and transfer agents who are charged with the duty of executing and issuing
stock certificates to execute and issue the necessary certificates for shares
of Common Stock upon the conversion of this Note.
2.2 Method of Conversion. This Note may be converted by the Holder in
whole or in part as described in Section 2.1(a) hereof and the Subscription
Agreement. Upon partial conversion of this Note, a new Note containing the
same date and provisions of this Note shall, at the request of the Holder, be
issued by the Borrower to the Holder for the principal balance of this Note and
interest which shall not have been converted or paid.
2.3 Maximum Conversion. The Holder shall not be entitled to convert
on a Conversion Date that amount of the Note in connection with that number of
shares of Common Stock which would be in excess of the sum of (i) the number of
shares of Common Stock beneficially owned by the Holder and its affiliates on a
Conversion Date, (ii) any Common Stock issuable in connection with the
unconverted portion of the Note, and (iii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to which the
determination of this provision is being made on a Conversion Date, which would
result in beneficial ownership by the Holder and its affiliates of more than
4.99% of the outstanding shares of Common Stock of the Borrower on such
Conversion Date. For the purposes of the provision to the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be
limited to aggregate conversions of only 4.99% and aggregate conversion by the
Holder may exceed 4.99%. The Holder shall have the authority and obligation to
determine whether the restriction contained in this Section 2.3 will limit any
conversion hereunder and to the extent that the Holder determines that the
limitation contained in this Section applies, the determination of which
portion of the Notes are convertible shall be the responsibility and obligation
of the Holder. The Holder may waive the conversion limitation described in
this Section 2.3, in whole or in part, upon and effective after 61 days prior
written notice to the Borrower. The Holder may allocate decide whether to
convert a Note or exercise Warrants to achieve an actual 4.99% ownership
position.
2.4. Optional Redemption of Principal Amount. Provided an Event of
Default has not occurred, whether or not such Event of Default has been cured,
the Borrower will have the option of prepaying the outstanding Principal Amount
("Optional Redemption"), in whole or in part, by paying to the Holder a sum of
money equal to one hundred and twenty percent (120%) of the Principal Amount to
be redeemed, together with accrued but unpaid interest thereon and any and all
other sums due, accrued or payable to the Holder arising under this Note or any
Transaction Document through the Redemption Payment Date as defined below (the
"Redemption Amount"). Borrower's election to exercise its right to prepay must
be by notice in writing ("Notice of Redemption"). The Notice of Redemption
shall specify the date for such Optional Redemption (the "Redemption Payment
Date"), which date shall be thirty (30) business days after the date of the
Notice of Redemption (the "Redemption Period"). A Notice of Redemption shall
not be effective with respect to any portion of the Principal Amount for which
the Holder has a pending election to convert pursuant to Section 2.1, or for
conversions initiated or made by the Holder pursuant to Section 2.1 during the
Redemption Period. On the Redemption Payment Date, the Redemption Amount,
less any portion of the Redemption Amount against which the Holder has
exercised its rights pursuant to Section 2.1, shall be paid in good funds to
the Holder. In the event the Borrower fails to pay the Redemption Amount on the
Redemption Payment Date as set forth herein, then (i) such Notice of Redemption
will be null and void, (ii) Borrower will have no right to deliver another
Notice of Redemption, and (iii) Borrower's failure may be deemed by Holder to
be a non-curable Event of Default.
ARTICLE III
EVENT OF DEFAULT
The occurrence of any of the following events of default ("Event of
Default") shall, at the option of the Holder hereof, make all sums of principal
and interest then remaining unpaid hereon and all other amounts payable
hereunder immediately due and payable, upon demand, without presentment, or
grace period, all of which hereby are expressly waived, except as set forth
below:
3.1 Failure to Pay Principal or Interest. The Borrower fails to pay
any installment of principal, interest or other sum due under this Note when
due and such failure continues for a period of ten (10) business days after the
due date.
3.2 Breach of Covenant. The Borrower breaches any material covenant
or other term or condition of the Subscription Agreement or this Note in any
material respect and such breach, if subject to cure, continues for a period of
ten (10) business days after written notice to the Borrower from the Holder.
3.3 Breach of Representations and Warranties. Any material
representation or warranty of the Borrower made herein, in the Subscription
Agreement, or in any agreement, statement or certificate given in writing
pursuant hereto or in connection therewith shall be false or misleading in any
material respect as of the date made and the Closing Date.
3.4 Receiver or Trustee. The Borrower shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed without
the consent of the Borrower is not dismissed within sixty (60) days of
appointment.
3.5 Judgments. Any money judgment, writ or similar final process
shall be entered or filed against Borrower or any of its property or other
assets for more than $75,000, and shall remain unvacated, unbonded or unstayed
for a period of forty-five (45) days.
3.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law,
or the issuance of any notice in relation to such event, for the relief of
debtors shall be instituted by or against the Borrower and if instituted
against Borrower are not dismissed within forty-five (45) days of initiation.
3.7 Delisting. Delisting of the Common Stock from any Principal
Market; failure to comply with the requirements for continued listing on a
Principal Market for a period of five consecutive trading days; or notification
from any Principal Market that the Borrower is not in compliance with the
conditions for such continued listing on such Principal Market.
3.8 Non-Payment. A default by the Borrower under any one or more
obligations in an aggregate monetary amount in excess of $75,000 for more than
twenty days after the due date, unless the Borrower is contesting the validity
of such obligation in good faith.
3.9 Stop Trade. An SEC or judicial stop trade order or Principal
Market trading suspension that lasts for five or more consecutive trading days.
3.10 Failure to Deliver Common Stock or Replacement Note. Borrower's
failure to timely deliver Common Stock to the Holder pursuant to and in the
form required by this Note and Sections 7 and 11 of the Subscription Agreement,
or, if required, a replacement Note.
3.11 Non-Registration Event. The occurrence of a Non-Registration
Event as described in Section 11.4 of the Subscription Agreement.
3.12 Reservation Default. Failure by the Borrower to have reserved
for issuance upon conversion of the Note the amount of Common stock as set
forth in this Note and the Subscription Agreement.
3.13 Cross Default. A default by the Borrower of a material term,
covenant, warranty or undertaking of any other agreement to which the Borrower
and Holder are parties, or the occurrence of a material event of default under
any such other agreement which is not cured after any required notice and/or
cure period.
ARTICLE IV
SECURITY INTEREST
4. Security Interest/Waiver of Automatic Stay. This Note is secured
by a security interest granted to the Collateral Agent for the benefit of the
Holder pursuant to a Security Agreement, as delivered by Borrower to Holder.
The Borrower acknowledges and agrees that should a proceeding under any
bankruptcy or insolvency law be commenced by or against the Borrower, or if any
of the Collateral (as defined in the Security Agreement) should become the
subject of any bankruptcy or insolvency proceeding, then the Holder should be
entitled to, among other relief to which the Holder may be entitled under the
Transaction Documents and any other agreement to which the Borrower and Holder
are parties (collectively, "Loan Documents") and/or applicable law, an order
from the court granting immediate relief from the automatic stay pursuant to 11
U.S.C. Section 362 to permit the Holder to exercise all of its rights and
remedies pursuant to the Loan Documents and/or applicable law. THE BORROWER
EXPRESSLY WAIVES THE BENEFIT OF THE AUTOMATIC STAY IMPOSED BY 11 U.S.C. SECTION
362. FURTHERMORE, THE BORROWER EXPRESSLY ACKNOWLEDGES AND AGREES THAT NEITHER
11 U.S.C. SECTION 362 NOR ANY OTHER SECTION OF THE BANKRUPTCY CODE OR OTHER
STATUTE OR RULE (INCLUDING, WITHOUT LIMITATION, 11 U.S.C. SECTION 105) SHALL
STAY, INTERDICT, CONDITION, REDUCE OR INHIBIT IN ANY WAY THE ABILITY OF THE
HOLDER TO ENFORCE ANY OF ITS RIGHTS AND REMEDIES UNDER THE LOAN DOCUMENTS
AND/OR APPLICABLE LAW. The Borrower hereby consents to any motion for relief
from stay that may be filed by the Holder in any bankruptcy or insolvency
proceeding initiated by or against the Borrower and, further, agrees not to
file any opposition to any motion for relief from stay filed by the Holder.
The Borrower represents, acknowledges and agrees that this provision is a
specific and material aspect of the Loan Documents, and that the Holder would
not agree to the terms of the Loan Documents if this waiver were not a part of
this Note. The Borrower further represents, acknowledges and agrees that this
waiver is knowingly, intelligently and voluntarily made, that neither the
Holder nor any person acting on behalf of the Holder has made any
representations to induce this waiver, that the Borrower has been represented
(or has had the opportunity to he represented) in the signing of this Note and
the Loan Documents and in the making of this waiver by independent legal
counsel selected by the Borrower and that the Borrower has discussed this
waiver with counsel.
ARTICLE V
MISCELLANEOUS
5.1 Failure or Indulgence Not Waiver. No failure or delay on the part
of Holder hereof in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof
or of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5.2 Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile,
addressed as set forth below or to such other address as such party shall have
specified most recently by written notice. Any notice or other communication
required or permitted to be given hereunder shall be deemed effective (a) upon
hand delivery or delivery by facsimile, with accurate confirmation generated by
the transmitting facsimile machine, at the address or number designated below
(if delivered on a business day during normal business hours where such notice
is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur.
The addresses for such communications shall be: (i) if to the Borrower to:
South Texas Oil Company, 6330 McLeod Drive, Suite 1, Las Vegas, NV 89120, Attn:
Murray Conradie, President and CEO, telecopier: (210) 568-9761, with an
additional copy by telecopier only to: Owen M. Naccarato, Esq., Naccarato &
Associates, 18301 Von Karman Ave., Suite 430, Irvine, CA 92612, telecopier:
(949) 851-9262, and (ii) if to the Holder, to the name, address and telecopy
number set forth on the front page of this Note, with a copy by telecopier only
to Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York
10176, telecopier number: (212) 697-3575.
5.3 Amendment Provision. The term "Note" and all reference thereto,
as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented.
5.4 Assignability. The obligations of Borrower under this Note are
not assignable without the consent of the Holder. This Note shall be binding
upon the Borrower and its successors and assigns, and shall inure to the
benefit of the Holder and its successors and assigns.
5.5 Cost of Collection. If default is made in the payment of this
Note, Borrower shall pay the Holder hereof reasonable costs of collection,
including reasonable attorneys' fees.
5.6 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York. Any action brought by
either party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the civil or state courts of New York or in
the federal courts located in the State and county of New York. Both parties
and the individual signing this Agreement on behalf of the Borrower agree to
submit to the jurisdiction of such courts. The prevailing party shall be
entitled to recover from the other party its reasonable attorney's fees and
costs.
5.7 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate
of interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
5.8 Shareholder Status. The Holder shall not have rights as a
shareholder of the Borrower with respect to unconverted portions of this Note.
However, the Holder will have all the rights of a shareholder of the Borrower
with respect to the shares of Common Stock to be received by Holder after
delivery by the Holder of a Conversion Notice to the Borrower.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its
name by an authorized officer as of the 28 day of July, 2005.
SOUTH TEXAS OIL COMPANY
By: /s/ Murray Conradie
Name: Murray Conradie
Title: President
WITNESS:
By: /s/ Jason Griffith
Name: Jason Griffith
Title: CFO
NOTICE OF CONVERSION
(To be executed by the Registered Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal and
$_________ of the interest due on the Note issued by South Texas Oil Company on
July ___, 2005 into Shares of Common Stock of South Texas Oil Company (the
"Borrower") according to the conditions set forth in such Note, as of the date
written below.
Date of Conversion:____________________________________________
Conversion Price:______________________________________________
Shares To Be Delivered:________________________________________
Signature:_____________________________________________________
Print Name:____________________________________________________
Address:_______________________________________________________
_________________________________________________________